Europe's central bank boss turned the knife on desperate eurozone leaders with a warning that only full-scale agreement at a series of meetings next week would allow him to use the European Central Bank's full firepower.

Mario Draghi said the ECB stood ready to take fresh steps to deal with the crisis, but was unable to deploy its financial arsenal before leaders took steps to agree closer fiscal ties. "It is first and foremost important to get a commonly shared fiscal compact right," he told the European parliament. "I think the next few days will be very important to tell us whether we make progress on this."

Amid fears for the solvency of several European banks, Draghi said the risks of a full-blown recession in the eurozone had increased.

One bank estimated the UK would suffer a 5% drop in national income from a break-up of the eurozone, while Germany would see national income dive 7% and across the single currency zone it would collapse by 12%.

Leaders meet next week in Brussels for what is being billed as the final effort to solve the euro crisis.

The British prime minister, David Cameron, will join his counterparts from across the 27 member nations of the European Union to discuss plans put forward by finance ministers and the new Italian prime minister, Mario Monti.

The meeting will follow a conference in Marseille of the rightwing European People's party, which commands a majority in the Strasbourg parliament and boasts France's UMP, led by President Nicolas Sarkozy, and the Christian Democrats of the German chancellor, Angela Merkel, as members.

Monti is under pressure to produce a fully fledged budget that includes measures to boost growth alongside €25bn (£21.5bn) of cuts, which will be debated in the Italian parliament on Monday.

Merkel waded into the debate with a call for fundamental reforms to deal with the causes of the crisis. She again rejected borrowing with collective eurobonds and plans to allow the ECB to print money as only dealing with the symptoms of the problems.

The measured tone adopted by Merkel in a newspaper interview belied the panic across the continent as one country after another signalled it was preparing for a recession and possibly worse as the eurozone crisis deepened.

Even safe havens such as Norway and Sweden have suffered surprise jumps in unemployment, while Denmark cut interest rates to below the ECB's 1.25% base rate.

Analysts said they were also worried about the state of the Hungarian economy after the Budapest government approached the International Monetary Fund over a possible bailout.

Hungary is the destination for huge investments by eurozone banks, especially institutions in Austria and Germany. It is possible the investments and loans may need to be written off, leaving lenders with large holes in their balance sheets.

Mark Cliffe, chief economist at the Dutch bank ING, said he doubted the eurozone's leaders could implement a grand plan should they manage to agree on a way forward. He said a collapse would also drag down other European nations outside the currency zone including Britain, Sweden and Denmark.

Draghi, who is only a month into his presidency, said for the first time that he wanted to ensure inflation did not undershoot or exceed its target of just below 2%. The inclusion of the word undershoot was seen by traders as a clear signal that the ECB council would cut rates when it meets next Thursday.

The council is also expected to discuss creating electronic money to ease concerns that Europe is heading for a second credit crunch in four years.

Until now the Germans, Dutch and Finnish governments have prevented the ECB from adopting the same quantitative easing policy as the Federal Reserve and Bank of England.

The ECB also stands ready to buy the debts of ailing economies, in particular Italy and Spain, which have seen the interest rates they pay on 10-year borrowings soar in recent weeks.

Draghi said the bond purchase plan was a means "to repair monetary transmission channels", adding that: "In our view now the most important thing for the ECB to do is to repair the credit channel."

An ECB survey released showed small and medium-sized businesses in the eurozone expect their access to bank loans to worsen in the near future.

Although it was the first time Draghi had addressed a full sitting or so-called plenary session of the European parliament, only a handful of its 736 lawmakers turned up to listen or ask him a question.

For those who were present, Draghi delivered a sobering message on the economic outlook. "We have observed serious credit tightening in the most recent period, which combined with the weakening of the business cycle, doesn't bode at all well for the months to come," he said.